Saving for your retirement is a great way to ensure you have a source of income even after you end your career. A 401(k) is a fairly standard way of doing this. With a 401(k), pre-tax dollars are taken from your wages and applied directly to your plan’s investments. Often, your employer will match this contribution, but it is not required. With a 401(k), your investments are limited to stocks, bonds, and mutual funds. This type of 401(k) is known as a “traditional” account.
If you would like to have more control and investment options, however, consider opening a self-directed 401(k). Also known as a solo 401(k)—or what the IRS calls a one-participant 401(k)—these accounts allow you to invest in much more, including precious metals, private placements, foreign currencies, and real estate.
For many, the opportunity to invest in real estate is the primary reason they switch to a solo 401(k). Let’s take a look.
It is true – you could purchase real estate with the money in your personal bank account. Not only would this give you a more immediate payday, but you would have direct control over what you did with the property.
However, if you used your personal finances to invest in real estate, any gains would be subject to federal and state taxes, therefore reducing your actual profit margin. This is not so for a solo 401(k). When you use a solo 401(k) to invest in real estate, your gains are tax-deferred. This gives you a larger fund pool to use for future investment opportunities.
A solo 401(k) is not the only retirement-planning vehicle you can use to invest in real estate. However, it does offer several features that make it easier and almost completely hassle-free when compared to other options.
When using your solo 401(k) to invest in real estate, there are six basic steps that you will need to take.
When it comes to expenses related to your solo 401(k) real estate purchase, all payments must come from your retirement account. If you use your personal finances, the IRS will consider it an early distribution, resulting in penalties and taxes. This is easy, however, because of the checkbook control you get when you open a bank account in your solo 401(k)’s name.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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